Thank you, Patty.
The handout I've given you is just a summary I'll speak to. If you have further questions, we'll try to handle them as they come up.
Essentially, the deal is one in which there is a turnover of buildings for cash and in which the new owners make a commitment to make certain capital improvements, not all, but those that are published in a schedule that the lessors were told they would have to commit to doing. These run to about 60% to 70% of the known, expected capital expenditures. They vary by building.
The government, at the same time, commits to pay the lease on the space for 25 years, indexed at 2%, although it's not clear whether that's 2% or the CPI, which could be different, and has an option to renew for two ten-year periods at market rates at that point. But the starting point on this is a set of lease amounts. It is interesting to note, from looking at earlier drafts of the discussion in some of the earlier studies, that the lease amounts per square foot in the final documents appear to have gone up an average of about $2 per square foot in the parts on which people actually finally bid.
The lessee, the government, as part of its leasing operation, is expected to pay all operating costs and any capital costs not specified as the responsibility of the lessor. So the risk--and a lot of the discussion around this, in general, was a discussion of the transfer of risk--of operating cost overruns and the risk of additional capital requirements is still being carried by the government.
There is an option at the end of 25 years, also, for the government to give up the buildings and not continue leasing them at market rates or to continue leasing them. They can also buy the buildings at the end of the 25-year period. That is done on the basis of the lease value at the end of the period. So it's the index value moved forward 25 years divided by what's called the capitalization rate, or the cap rate. That cap rate is specified in the lease. That's not been made public. We have made the assumption that it appears to be about 6%, but some of the other documents and commentary that have been released use numbers that are substantially higher than that, and if they are, of course that will affect that out-year cost.
There are a number of different ways of looking at it. You can just look at it on the basis of what happens in the first year, in 2008, say. In the Hays Building, it was previously $5 million net that was being paid by the government for operating costs and a net of their parking revenue. They will now pay $20 million, which is the lease payment, and they will lose the parking in the process, and so on.
We've gone over the seven properties. We did the analysis originally on the nine properties, but the two Vancouver properties have been removed from this presentation, given that they are in a state of limbo. I guess that would be the best way of describing it at the moment. With some of the recent claims on some of the Ottawa buildings, limbo may get bigger over time, as well, if others see this as an opportunity to put forward their requirements or demands.
This gap will widen over time from what you see here in the first year. Because of indexing, the operating costs covered by the tenant, we're assuming in the two cases, before and after, would be the same. Again, one can argue as to whether that will be the case or not.
Without the sale, the government faced a capital cost of about $105 million over the 25-year period for what has to be done in terms of major repairs. The lessor has indicated a willingness to accept $70 million of that, or about 68% in aggregate. This varies from between 50% and 90%, or 50% and 89%, depending on the building you are looking at.
The only thing I would make sure you keep in mind is that these are for the capital costs identified in the schedule. Anything that is not identified will be at the cost to the government as the tenant, as it would be in the case where they still held it, so we've not tried to raise that in the analysis as a differential element.
What we call the net present value of this lessor portion—in other words, what is the value if you were to try to put aside something to finance all these changes today—is about $54 million. So that's the value of that particular item.
In summary, the numbers around these projects, for the seven buildings, the revenue in what we call this net present value, is about $1.2 billion. There's a residual value on the buildings at the point at which there is an option available in 25 years. We estimate that to be $522 million. The capital being provided by the lessor is a $54-million reduction in cost to government. The total of that is $1.7 billion. The sale price, as near as we can determine it, is $1.4 billion for the seven buildings. This gives you a loss to the taxpayer of about $366 million, again, in net present-value dollars today.
This loss, of course, is over a 25-year period. We went out only 25 years, because after 25 years, the arrangements are such that the lease is on the basis of market value at that time, and one would normally take the market value to be one that would represent the balance between the value of the buildings and the payments for the use of that building, but it's in this first 25 years that the lease amount is fixed and where there is this indexing provision that's been put in place.
So that gives you at least an overview of the numbers. I think the general sense that one has is that the payments are generous. The risks are still on behalf of the tenant in terms of net operating costs and in terms of additional capital costs. The reason the values that came out of some of the studies that were tabled—particularly the Deutsche Bank study, and the Bank of Montreal studies as well—seem so low is based on a view that the residual value of these buildings is essentially very low, so much so that one wonders why they even bothered putting the number into it.
Of course, if they are in fact worth so little, then presumably the government will find it profitable to buy them back at that very low cost and return the situation to what it is today. But our view is that the value of those buildings, properly kept up, as they would be, is substantially higher than they were in these other studies. That represents a situation in which the value of this transaction is quite a bit more, because not only are you committing to these lease costs for 25 years as a government, but you're saying, “We're also going to throw in any claim we have on that building by surrendering it to you today rather than holding onto it.”
Let me turn it back over to Patty for some closing comments.
